REIT M&A is approaching an inflection point. The pipeline for deals continues to build, with pressure from both the sell-side and the buy-side, and the post-Covid impediments continue to erode away, particularly as the direction of travel on interest rates and macro-trends becomes a little clearer. Given the strong fundamentals in most REIT sectors, many high-quality REITs now look relatively cheap, especially as compared to private valuations.
As we enter the new year, we are keeping an eye on the following ten themes:
1. Activism. The last quarter has been unusually active, with several campaigns underway, pushing for strategic transactions, sale of assets, changes in management or board, or other actions to shake up a stagnant share price. Activists should not be allowed to distract boards from focusing on their core responsibilities, especially not repeat players who take small positions and have revealed a lack of long-term alignment through their mediocre track records. As always, care should be taken to calibrate responses appropriately, and to prepare in advance, monitor accumulations, and be your own activist well in advance of any attack. Our latest guide on activism preparedness can be found here.
2. M&A Innovations. The legal framework for market checks continues to evolve in a positive direction, increasingly facilitating innovative dealmaking, especially in Maryland, where many REITs are incorporated. Most key jurisdictions now permit calibration of market-checks to the facts on the ground, allowing both pre- and post-signing checks, with customized deal protections, including a range of go/no shops, break fees and two-tier hybrid structures that match the circumstances. Our latest thoughts on the M&A and Private Equity markets can be found here and here.
3. Stock-for-Stock Deals. Relative value, stock-for-stock deals remain popular, in part because they bypass cost of capital impediments and thorny valuation discussions. Fixed exchange ratios remain common. Smart investors and transacting parties will avoid the confusion of measuring deal value by spot-price in stock-for-stock transactions that allow for ongoing investment participation on both sides and are fundamentally not take-out or change-in-control transactions, but rather will evaluate the long-term investment proposition afforded by a combined company and the ongoing participation for shareholders from both transacting parties.
4. Restructurings. While fewer than many expected, we have seen a number of restructurings of REITs with excessive debt loads, and a few more are potentially in the works. Given the high cost of bankruptcy proceedings and the likelihood of delay, out-of-court workouts are almost always preferable if consensus can be reached.
5. Governance. Our updated list of key issues for boards to keep an eye on can be found here, with succession planning, board refreshment, risk management and diversity high on the list in the current environment. Our current thinking and advice on risk management is set out in our recent memo.
6. Spinoffs. Disrupted REITs often think about good-REIT/bad-REIT separations. Easier said than done, and often stymied by debt covenants and questions about who wants to own the stub.
7. NAVs. REITs considering a major transaction would do well to look closely at their internal valuations, or NAVs, and if appropriate revise them to reflect the current market. Historic, unrealistic NAVs can create unnecessary impediments to deals and can increase and complexify litigation risk.
8. Digitalization. AI has now been firmly added to (the top of) the usual list of trends for boards to track, both defensively and, just as important, because of the opportunities that might be created. Just ask Claude.
9. Liquidations. While the frictional costs can be high, for some REITs liquidation may prove to be the best course for maximizing shareholder value. In the appropriate circumstances, adopting a formal plan of liquidation at the right time can be beneficial from tax and other perspectives.
10. 280G. The so-called “golden parachute” 20% excise tax on certain change-in-control payments should be considered in the early stages of any potential transaction. The governing rules and calculations are complex and sometimes punitive, and mitigation is likely to be easier and more effective if issues are spotted early.
Buckle up for another busy year.
